Unusual Options Activity Shines Spotlight On Direxion's Leveraged JNUG, JDST ETFs

Precious metals barometer SPDR Gold Trust GLD — an exchange-traded fund that tracks the price of physical gold — recently raised eyebrows as one of the highlights in Benzinga's unusual options activity screener. However, the sentiment clocked in as "bearish," running counter to the current trade.

Specifically, the trade in question was for 125 contracts of the $193 call option expiring Jan. 15, 2027. At the time of writing, the premium (ask price) for this derivative landed at $73.60. By logical deduction, call purchasers would need the GLD ETF to hit $266.60 (the strike price plus the premium) just to break even.

Based on the data provided by the options screener, the sentiment reading implies that institutional or professional traders are selling calls: they're effectively underwriting the risk that the gold fund will not rise to profitability. This action potentially clashes with prevailing wisdom.

On a year-to-date basis, the SPDR Gold Trust gained almost 32% of market value. In the past five sessions, it moved up almost 3%, demonstrating sustained resilience. Moreover, experts such as renowned economist Mohamed El-Erian noted that western nations cannot afford to ignore the precious metal.

Nevertheless, the bears' thesis may revolve around cooling inflation trends. While elevated prices relative to the pre-pandemic paradigm still pose challenges for millions of Americans, encouraging disinflationary trends could alleviate concerns over time. But that would also suggest a downcast framework for gold, which cynically benefits from inflation (all other things being equal).

The Direxion ETFs: Of course, a possibility always exists that investors could be reading market signals incorrectly. The potential for unexpected movements in the precious metals space could breathe life into Direxion's leveraged gold funds. In particular, trading activity on the metal itself could impact sentiment for the underlying mining industry.

For the optimists, the Direxion Daily Junior Gold Miners Index Bull 2X Shares JNUG aim to provide daily investment results of 200% of the performance of the MVIS Global Junior Gold Miners Index. On the other end of the spectrum, the Direxion Daily Junior Gold Miners Index Bear 2X Shares JDST also provide 200% performance of the aforementioned index but in the inverse direction.

Interested investors must realize, though, that the JNUG and JDST ETFs are designed for exposure lasting no more than one day. Due to the daily compounding of volatility, positions held for longer than recommended may encounter decay relative to expected performance.

The JNUG ETF: Thanks to strong sentiment for gold, the JNUG ETF unsurprisingly has been strong this year, gaining over 75%.

• Conspicuously, the 2X bull fund has benefited from strong support represented by its 200-day moving average, which is an encouraging sign.
• JNUG recently soared well above its 50 DMA, which seems to suggest that the gold market has legs remaining.
• Nevertheless, the bearish options activity in the GLD fund is a development to watch closely.

The JDST ETF: Longstanding inflation challenges following the COVID-19 disruption have not been kind to JDST, which has lost more than 62% of value since the start of this year.

• The gold bear fund finds itself well below its 200 DMA while the 50 DMA is acting as near-term resistance.
• With JDST losing about 16% of value in the past five sessions, stopping the bleeding is a top priority for the pessimists.
• Still, selling volume appears to have declined since August, which may represent an early reversal signal.

Featured image by Csaba Nagy from Pixabay.